Exec lifts Kmart's stock into blue yonder

June was a wheeling-and-dealing kind of month for Kmart Holding Corp. Chairman Edward Lampert.

In two separate deals, his discount chain sold 78 stores to Sears, Roebuck and Co. and Home Depot Inc. for nearly $1 billion.

Not a bad start to the summer for a company that the Connecticut investor plucked from bankruptcy court only 18 months ago.

Since its shares resumed trading in June 2003, Kmart has become a highflier, its stock rocketing from $19 to $76 a share thanks to such deals as well as the market's willingness to follow Lampert.

"He's doing everything he can to drive up the stock price," said former Kmart executive Gary Ruffing, now head of the retail services group at turnaround management firm BBK Ltd. "Even people who own only a few Kmart shares are happy."

Folks are also wondering what he has planned for another down-on-its-luck American icon, Sears.

His holdings in the Hoffman Estates-based department store chain have doubled to 14 percent since October 2002. But Lampert has a different set of challenges with Sears.

"With Kmart, he bought in for almost nothing," said Howard Davidowitz, chairman of New York retail investment banking firm Davidowitz & Associates Inc.

"The problem with Sears is they have to turn it into a viable company, and that's difficult," he added.

Lampert, 41, is somewhat reclusive and plays his cards close to the vest. He declined to be interviewed for this story.

But one thing that he has made known is that he's a fan of Berkshire Hathaway Inc.'s Warren Buffett.

Both are value investors, favoring stocks out of favor. "If you want value, do you go to high tech? Retail is a mature industry," Davidowitz said.

Lampert has acknowledged that Buffett was one of his investing heroes. "[He's] No. 1 for his emphasis on looking at stocks as businesses and at the real economics of those businesses, as opposed to just looking at their reported earnings," he told the Washington Post in a 1995 interview.

And that fuels speculation that Kmart, as a retailer, is on the road to liquidation.

"He'll turn Kmart into an investment company just like Buffet did with Berkshire Hathaway," said Davidowitz, who has been involved in two retail liquidations. "He'll have a vehicle for acquisitions after there's no more Kmart."

The son of a lawyer and a housewife, Lampert grew up comfortably in Long Island.

But at age 14, his world was shattered when his father died of a heart attack. The death put the family's finances on shaky ground, fostering his desire to be financially set.

He got his interest in stocks from his grandmother, who had little money but dabbled in the market. "IBM and AT&T. She always wanted a good dividend," Lampert told The New York Times in a 2002 interview. "In her simplicity, she was profound."

In his senior year as an economics major at Yale University, Lampert interned at Goldman Sachs.

After graduation, he worked at the investment house for four years along with former U.S. Treasury Secretary Robert Rubin.

In 1988, Lampert started ESL Investments with the help of former Goldman Sachs bigwig Richard Rainwater.

Lampert's ESL is like a private investment firm for the megarich. It counts record mogul David Geffen and computer titan Michael Dell among its investors.

Investors are required to put up at least $10 million for a minimum of five years. Its classic investment style is to be contrarian and friendly, initially taking a stake of 10 percent to 12 percent in companies.

Kmart was a whole new ballgame for Lampert. When the Troy, Mich., discounter filed for bankruptcy in January 2002, Lampert's ESL owned about a third of Kmart's debts.

A year later, in January 2003, Lampert agreed to make an additional investment in Kmart in return for the ability to convert his claims to Kmart stock.

The reorganization also gave ESL the power to help pick four members of the board of directors and ultimately resulted in the firm becoming Kmart's biggest shareholder.

Willing to make a deal

In the 18 months since, ESL's stake has grown to more than half of Kmart. And during that time he has shown a willingness to unload anything that would bring a hefty price.

Take the sale of stores to Home Depot. Kmart is fetching an average price of $15 million for each of the 24 stores it's selling to the Atlanta-based home-improvement chain.

"He's saying, `It'll take us 10 years to make $15 million out of the stores, so let's sell them,'" said Ruffing, the former Kmart executive.

Through such deals, Lampert is building up a hoard of cash exceeding $2 billion. He hasn't said what he intends to do with that money.

"I'd expect at some point that cash would be returned to the shareholders, including himself, instead of reinvested in the business," a former Sears executive said.

Kmart also has about $3 billion of tax losses that it can apply to future earnings. Plus, with its stock price at lofty levels, the company's shares can double as currency, avoiding the need to use cash.

That's why others believe he'll ultimately turn Kmart into an investment vehicle just as Buffett has with Berkshire.

But even if Lampert's ultimate plan is to liquidate Kmart, the chain won't disappear tomorrow.

By striking only piecemeal deals to sell off its stores instead of having one massive liquidation, Lampert is able to maximize the price he gets for Kmart locations.Still, while Kmart is proving lucrative now, it could turn out to be a retail land mine. "He can play this game only so long," Davidowitz said.

Shoppers are increasingly throwing up their hands at Kmart. Its sales have been dropping by double-digit rates.

And Home Depot and Sears likely cherry-picked their better stores. That leaves Kmart with about 1,400 stores that are probably less desirable.

Rivals expanding rapidly

At the same time, rival discounters Wal-Mart and Target are opening hundreds of stores a year.

For its part, Kmart says it's in business for the long haul. It just announced hires of executives formerly with FTD, General Electric Capital and Ahold. It also struck a new marketing deal with WB television network.

These days, Lampert is also a looming presence at Sears.

"He's very present in the place," a former Sears executive said. "When a decision is made, the question is, `Who'll call Eddie?'"

Lampert is widely believed to have been behind Sears' decision to sell its credit business last year. Another former executive, however, doesn't buy it, believing there was another primary reason for the sale.

"Sears panicked in a bad credit cycle," the former Sears executive said, explaining that the decision came on the heels of well-publicized problems in the industry.

"No doubt (Sears CEO Alan) Lacy talks to Lampert, but that 's a far cry from calling the shots."

For its part, Sears said neither was a factor. It just got a good offer from Citigroup.

While Lampert is Sears' biggest single investor, he "has no input in nor does he manage the day-to-day operations of Sears," Sears spokesman Chris Brathwaite said.

"After making a major business decision, once we've made that public, we have in the past made a courtesy call to ESL to apprise them of our actions."

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